• Use of FX futures and forwards:

• World's largest FX futures exchanges:

• Forward contracts are traded:

• Most futures exchanges are relatively modern. For example: the futures exchange in Sydney opened in ____; in Hong Kong the futures exchange opened in _____; in London the year was _____; in Singapore the year was ____; and, in Tokyo the year was _______. The oldest modern futures exchange is the _____ which opened in 1848.

(1 ) The Basis:

Basis = F_o - S_o

Notice that the basis can be _____ or ______.

(2) The Spread:

Spread = F_o,d – F_o,n

Notice that the spread can also be _______or _______.

(3) Cross Hedging:

(4) Basis Hedging:

1. A Comparison of Futures and Forward Markets

Characteristic Forward Futures

1. Size of the Contract Tailored to individual

2. Delivery Date Tailored to individual

3. Method of Transaction Interbank Market

4. Participants Mostly Hedgers

Speculation discouraged

5. Commissions Set by bid/asked

6. Security Deposit Negotiable compensating

balance

7. Clearing House None

8. Accessibility Mostly large customers

9. Regulation Self- Regulating

10. Delivery 90% actual deliver

11. Price Limits None

12. Liquidity Very little

1. Standardization of contracts:

3. Liquidity/Clearing House:

4. Cash flow:

5. Fulfilling the terms of the contract:

C. How do Investors Choose Between Futures and Forwards

1.

2.

3.

4.

5.

6.

The value of a futures contract is:

F_o,n = C_o[l + {i_d,n/12}xN)/(l + {i_f,n/12}xN)]ⁿ

Where all variables are as previously defined and the FX rates are stated as indirect quotes.

The term (1 + i_d,n)/(1 + i_f,n) is referred to as the futures_________. Notice that equation (1) is equivalent to:

(1 ) To construct a good hedge:

(2) if domestic yields are higher than foreign yields:

(3) As the time to delivery approaches the futures price:

• Enter as a buyer or seller?

• How many futures contracts to buy or sell???

1. Naive Hedge:

2. Regression Hedge:

R_c,t = a + b _c,f x R_f,t + e _t

Note that beta b _c,f can also be obtained algebraically as follows:

b _c,f = (COV_c,f x s _f)/Var_f = (Corr_c,f x s _c)/s _f

Once beta has been obtained, then H=

The quotations were taken from the Tuesday xx/xx/99 WSJ

EXCHANGE ABBREVIATIONS

(for commodity futures and futures options)

CST=Chicago Board of Trade; CME=Chicago Mercantile Exchange; CSCE=Coffee, Sugar & Cocoa Exchange, New York; CMX-COMEX (Div. of New York Mercantile Exchange); CTN=New York Cotton Exchange; DTB=Deutsche Termin Borse; FINEX=Financial Exchange (Div. of New York Cotton Exchange); IPE=International Petroleum Exchange; KC=Kansas Citv Board of Trade; LIFFE=London International Financial Futures Exchange; MATIF= a Terme International de France; ME=Montreal Exchange; MCE=MidAmerica Commodity Exchange; MPLS=Minneapolis Grain Exchange; NYFE=New York Futures Exchange (Sub. of New York Cotton Exchange); NYM=New York Mercantile Exchange; SIMEX=Singapore International Monetary Exchange Ltd.; SFE=Sydney Futures Exchange; TFE=Toronto Futures Exchange; WPG=Winnipego CommodityExchange.

*Chicago Board of Trade

*Chicago Mercantile Exchange

*International Monetary Market (Chicago)

*Chicago Rice and Cotton Exchange

* New York Cotton Exchange

*Minneapolis Grain Exchange

*New York Mercantile Exchange

*Twin Cities Board of Trade-Minneapolis

*Commodity Exchange Inc.

*Kansas City Board of Trade

*MidAmerica Commodity Exchange

*Philadelphia Board of Trade

*New York Futures Exchange

*Coffee, Sugar and Cocoa Exchange, Inc.

*The Montreal Exchange

*Toronto Futures Exchange

*The Winnipeg Commodity Exchange

*Baltic Futures Exchange

*International Petroleum Exchange of London

*London International Financial Futures Exchange Ltd.

*London Metal Exchange

*London Grain Futures Market

*London Meat Futures Exchange

*London Potato Futures Market

*Soya Bean Meal Futures Market

*Brazilian Futures Exchange

*Sao Paulo Commodities Exchange-Brazil

*Bolsa Mercantile and Futures-Brazil

*Hong Kong Futures Exchange

*Deutsche Terminborse-Germany

*Finnish Options Brokers, Ltd.

*Amsterdam Futures

*Irish Futures and Options Exchange

*International Futures and Options de France

*Singapore International Monetary Exchange

*New Zealand Futures Exchange

*Osaka Securities Exchange-Japan

*Sydney Futures Exchange

*Swedish Options and Futures Exchange

*Stockholm Options Markets

*Tokoyo Commodity Exchange for Industry

*Futures and Options Exchange in Luxembourg